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Further gains in the market still seem likely, even after the strong rebound
Tony Brennan
Strategist
(+61) 2 8258-1630
tony.brennan@db.com
Tim Baker
Research Analyst
(+61) 2 8258-1376
timothy.baker@db.com
Deutsche Bank AG/Sydney
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LOCATED IN APPENDIX 1. MICA(P) 106/05/2009
Contents
Page
Model portfolio 2
Portfolio strategy 3
Portfolio performance 4
Market outlook 5
Major sector outlook 15
Industrials 20
Banks 27
Resources 30
Reporting season overview 35
Forecasts
28-Aug Dec-09 Jun-09
ASX200 index 4490 5000 5250
RBA cash rate 3.00 3.00 3.25
10-year bond yield 5.44 5.00 5.00
Global Markets Research Company
􀂄 With reporting now largely complete, the final week has not altered the earlier
trend of results on average meeting expectations, and of analysts tending to
upgrade forecasts for FY10 earnings, on balance by about 5%. Earnings have
still fallen considerably across the market over the past year, and consensus
forecasts for a fall in market EPS of around 15% in FY09 going into results
have largely been confirmed. But this was fairly inevitable, given the collapse
of financial markets, the domestic recession, and the amount of equity
issuance, but the encouraging aspect is that earnings weren’t weaker.
Towards the end of the report we provide some detail of the results for all the
companies, further to our earlier commentaries, but given the relatively
decent tone to results on average, it seems timely to move on to the outlook.
􀂄 As earnings have been reported, the market has of course risen further since
early July, and is now up over 40% from its low six months ago. But this still
leaves it around 35% down from its peak in late 2007, after having more than
halved during the financial crisis, and the fall is now more in line with the
downturn occurring in earnings (which will continue into FY10 due to the
dilutive effect of the equity issuance). The PE ratio on forward earnings is now
back close to 15x again, the long run average, implying the market is factoring
in likely FY10 earnings, but not potentially higher earnings again further out.
With the PE on FY11 earnings at only 13x, and growth of 25% allowed for in
FY11 - plausible enough in a recovery – there still seems scope for the market
to rise further, another 10% at least, as the earnings recovery approaches.
􀂄 With the market potentially continuing to record above average gains for a
while, it’s also likely the better performance in the market will continue to
come from the “high beta” or cyclical stocks, as it has over the past six
months. Share prices of these stocks are now also more in line with earnings,
and the great value apparent when prices were low earlier in the year isn’t as
evident now. But there still seems to be value when prices are judged against
potential “mid-cycle” earnings, when the economy has fully recovered, so
good performance in the cyclical sectors could continue for a while as
recovery unfolds. We continue to see outperformance coming from the
consumer discretionary and industrial sectors, along with the financial stocks,
and at the front of the report we set out our portfolio advice in more detail.
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